Bergman v CGU Insurance Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

S CI 2015 01098

ARI BRAHAM BERGMAN	Plaintiff
v
CGU INSURANCE LIMITED ACN 004 478 371	Defendant

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATE OF HEARING:	1–4, 9 December 2015
DATE OF JUDGMENT:	9 March 2016
CASE MAY BE CITED AS:	Bergman v CGU Insurance Ltd
MEDIUM NEUTRAL CITATION:	[2016] VSC 81

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INSURANCE – Non disclosure – Property comprising land and residential buildings purchased by insured with intention to demolish buildings and build new family residence when circumstances permitted – Property leased in meantime – Insured did not disclose intention to demolish buildings when effecting property insurance – Fire at property during policy period – Whether intention to demolish relevant to the insurer’s risk and ought to have been disclosed – Whether insurer would have declined risk on any terms if intention disclosed – Held: material non-disclosure relevant to risk and insurer’s liability under policy should be reduced to nil – Insurance Contracts Act 1984 (Cth) ss 21, 28.

INSURANCE – Misrepresentation – Question in insurance proposal as to whether insured property ‘to be demolished’ – Proposed insured intended to demolish when circumstances permitted – Whether insured’s answer ‘no’ contained representation that he did not intend to demolish – Whether representation false – Held: answer wrong and amounted to misrepresentation at inception of policy – Whether misrepresentation a continuing representation on later renewals of policy – Held: representation continued at later renewal – Fire at property during policy period – Whether insurer would have declined risk on any terms if question answered correctly – Held: insurer’s liability under policy should be reduced to nil – Insurance Contracts Act 1984 (Cth) ss 26, 28; Limit No 2 Ltd v AXA Versicherung AG [2009] Lloyd’s Rep I.R. 396, 403 [26], 403–4 [27]; FAI v McSweeney & Ors (1999) 10 ANZ Ins Cases 61–443 at 75,052–4; Sutton on Insurance Law Thomson Reuters, 4^thed, Volume 1, 618–9 [7.940], 622–3 [7.960], considered.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr C M Caleo QC with Mr H L Redd	Cornwall Stodart
For the Defendant	Mr A G Uren QC with Mr M I Ravech	Holman Webb

TABLE OF CONTENTS

Factual narrative................................................................................................................................. 3

What was the plaintiff’s intention regarding demolition at the 2013 renewal date?......... 24

Was the plaintiff’s failure to disclose his intention regarding demolition at the 2013 renewal date a relevant non-disclosure?.............................................................................................................. 26

Relevance of demolition plans or orders................................................................................. 27
Relevance of Mr Bergman’s intention...................................................................................... 30
Knowledge................................................................................................................................... 34

What is the meaning of the demolition question?.................................................................... 36

Did the plaintiff’s answer to the demolition question contain a representation that he had no intention to demolish?.................................................................................................................... 40

Was that representation a misrepresentation at the time of the 2013 renewal?................... 40

Does s 28 of the Act apply to any such non-disclosure or misrepresentation?.................... 43

Non-disclosure............................................................................................................................ 43
Misrepresentation....................................................................................................................... 45

Is the defendant’s liability under the policy reduced to nil by operation of s 28 of the Act? 46

Non-disclosure............................................................................................................................ 46
Misrepresentation....................................................................................................................... 47

Did the plaintiff suffer loss for the purposes of the policy?................................................... 48

Conclusion......................................................................................................................................... 48

HIS HONOUR:

The plaintiff, Ari Bergman, is a qualified lawyer, holding an undergraduate Law/Arts degree and a Doctorate of Laws from Monash University. At the time of the relevant events he had, for about 10 years, acted as general counsel and company secretary for a large privately held group of companies.

Mr Bergman purchased the property at 7 Lynedoch Avenue, St Kilda East, in September 2010 for $1.8 million (‘the property’). At the time, the buildings on the property were being used as a rooming house. Mr Bergman’s intention was to demolish the buildings and construct a new home for his family ‘as soon as he conveniently could’ (‘the project’). In the meantime, he leased it on a monthly tenancy to the person conducting the rooming house.

The property was in a particularly desirable location for a future home for the Bergman family, given their Jewish faith. It was close to their synagogue and friends, thus allowing them to walk easy distances on the Jewish Sabbath. Their current home was and is not as suitable, being about half an hour’s walk away.

Mr Bergman engaged Midas Insurance Brokers Pty Ltd to assist him to obtain landlord’s insurance for the property. On Mr Bergman’s behalf, Midas applied for a Landlords Residential Property Insurance Policy with the defendant, CGU Insurance Ltd. The defendant agreed to insure the buildings on the property for $800,000, and the contents for $10,000, from 21 December 2010 to 21 December 2011.

The initial policy was renewed three times: 21 December 2011, 21 December 2012 and, finally, 21 December 2013 (‘2013 renewal date’) for the year ending 21 December 2014 (the ‘policy’).

On 17 September 2014, the buildings on the property were substantially damaged by fire. The property had been vacant for the previous two days as part of preparations to demolish the buildings before commencing building works for the Bergmans’ new home. In these circumstances, Mr Bergman made a claim under the policy for the cost of rebuilding or repairing the damaged portions of the buildings ‘to the same condition as when they were new’. The defendant denied the claim and Mr Bergman now sues to enforce the policy.

The policy provided insurance cover to Mr Bergman if the buildings and/or contents on the property were ‘destroyed, lost or damaged’. There is no issue that, subject to CGU’s defences, the policy was engaged.

When the policy was engaged, the defendant agreed to pay ‘the cost of rebuilding the buildings [on the property] or repairing the damaged portions to the same condition as when they were new’. However, the defendant’s obligation to rebuild or repair was subject to Mr Bergman commencing rebuilding or repairing within six months of the damage or loss occurring. It is now agreed that Mr Bergman commenced rebuilding and repairing within the six month period.

In summary, CGU’s defence is that:

(1) Mr Bergman failed to disclose his intention to demolish the buildings when he entered into the policy and at the 2013 renewal date;

(2) Mr Bergman gave a false answer to a specific question in his insurance declaration as to whether the buildings were ‘to be demolished’ (‘the demolition question’); and

(3) Mr Bergman has in any event suffered no loss because, at the time of the fire, he intended to demolish the buildings and proceed with the project.

The following issues arise for determination:

(1) What was the plaintiff’s intention regarding demolition at the 2013 renewal date?

(2) Was the plaintiff’s failure to disclose his intention regarding demolition at the 2013 renewal date a relevant non-disclosure?

(3) What is the meaning of the demolition question?

(4) Did the plaintiff’s answer to the demolition question contain a representation that he had no intention to demolish?

(5) Was that representation a misrepresentation at the time of the 2013 renewal?

(6) Does s 28 of the Insurance Contracts Act 1984 (Cth) (‘the Act’) apply to any such non-disclosure or misrepresentation?

(7) Is the defendant’s liability under the policy reduced to nil by operation of s 28 of the Act?

(8) Did the plaintiff suffer loss for the purposes of the policy?

Before turning to these questions, it is necessary to set out the factual narrative in more detail.

Factual narrative

In addition to the $1.8 million purchase price, Mr Bergman paid stamp duty and purchase costs of about $200,000, making a total purchase cost for the property of about $2 million. The purchase cost was substantially funded by debt — a loan of $1.44 million on the security of the property, and a $180,000 drawing on the mortgage over the Bergman family’s existing residence, which was and is owned by his wife — a total borrowing of $1.620 million. This was 90 per cent of the $1.8 million purchase price or about 80 per cent of the total purchase cost. Mr Bergman initially leased the property at only $700 per week, so the purchase made no commercial sense as an income producing investment property.

Prior to the initial policy being issued, Midas sent a ‘New Policy Declaration’ to Mr Bergman for completion and return (‘the Declaration’). Prior to receipt of the Declaration, Mr Bergman discussed the questions contained in it with a representative of Midas and provided answers. The Declaration sent to him by Midas included type-written answers following this conversation. Mr Bergman could not recall the conversation, but could recall that he read the questions and checked the answers before he signed the Declaration on 22 December 2010 and returned it to Midas. The demolition question forms part of one of the questions and answers in the Declaration:

[QUESTION] Is the property undergoing renovations over $75,000, OR, under construction, OR, to be demolished?
[ANSWER] No.[1]

[1]Emphasis added.

Midas then provided the Declaration to the defendant and the policy was issued. Evidence about the system operating between brokers such as Midas and the defendant established that the online system for submission of new policy declarations, known as the ‘Sunrise’ system, had a dropdown box which permitted, in effect, only a ‘yes’ or ‘no’ answer to the demolition question.

Very soon after purchasing the property, Mr Bergman sent an email to his friend (and, ultimately, project manager) Brad Nash of Blueprint Australia Pty Ltd, referring to previous discussions and his purchase of the property. He asked Mr Nash to look at the property with him for the purpose of discussing the project.

The initial policy was renewed in December 2011. Mr Bergman did not sign another insurance declaration at this time.

In August 2012, there was a violent incident at the property. One rooming house occupant attacked another and killed him. Mr Bergman made a claim on the policy for professional cleaning expenses following the incident. In the course of assessing his claim, the defendant became aware that the property was being let and occupied as a rooming house. The claim was, however, paid.

Following the incident, the occupancy of the rooming house was reduced and Mr Bergman agreed to reduce the rent to only $400 per week. This reduced the property’s value as an income producing investment.

A defence based on non-disclosure of the fact the property was being let as a rooming house, a matter relevant to the risk undertaken by the defendant under the policy, was abandoned at trial — apparently on the ground that the non-disclosure was known by the defendant before the 2013 renewal date: see s 21(2)(c) of the Act.

In December 2012, the policy was renewed and the 2012/2013 policy was issued. Mr Bergman did not sign another insurance declaration at this time.

In about late 2012, Mr Bergman engaged Mr Nash as a project manager for the project. Mr Nash was at times assisted in his project management role by John Cartwright and David Simon. Mr Bergman knew Mr Nash from prior experience while Mr Nash performed services for his employer. In his words, Mr Nash was ‘a peer of mine … and we’re quite friendly’. His general instruction to Mr Nash was to assist him and his wife with various options for the project, in circumstances where Mr Bergman was extremely busy.

In early 2013, Mr Bergman engaged Ross Larmer as a potential builder. Mr Bergman knew of Mr Larmer because he had built a couple of houses in Lynedoch Street and came reasonably well recommended.

In May 2013, R L Watts Design Pty Ltd provided detailed sketch plans for a proposed new home at the property. By letter dated 2 May 2013, Mr Larmer advised Mr and Mrs Bergman of his quote to construct the house in accordance with those sketch plans. He quoted the sum of $1,070,000, but this was subject to clarification of a number of items and the exclusion of other items, including costly items such as the proposed swimming pool, crossover, concrete steps, paths, retaining walls and any required landscaping.

In July 2013, Mr Nash obtained a quotation from P K Demolitions to demolish the buildings at the property, in the sum of $21,560. Mr Nash accepted this quotation and sent application forms for a demolition permit to Mr Bergman to either sign or authorise him as his agent to complete. Mr Bergman authorised Mr Nash to apply for a demolition permit but stated that he was unsure when demolition would commence. Mr Nash replied that the permit was ‘just preparation’ and there was ‘no pressure’ to proceed. He told Mr Bergman that the demolition permit would be ‘valid for 2 years I think’. The demolition permit was issued on 4 September 2013. The permit required the commencement of demolition works by 4 September 2014 and their completion by 4 September 2015.

On 2 October 2013, Mr Nash sent Mr Bergman an email concerning the project. He told Mr Bergman that Mr Larmer’s costs had increased by about $50,000–$60,000 and that he was in a position to proceed with the project ‘pending your finance situation’. He noted that Mrs Bergman wanted to ‘move forward on the house’ and that, in this context, he proposed to Mr Bergman that they ‘sit down and go through the project costs’ so Mr Bergman would know the total costs and could ‘make some decision going forward … either to hold or proceed’. Mr Bergman did not accept Mr Nash’s invitation to sit down and discuss the project costs. As appears below, he put the project ‘on hold’ until May 2014.

In the meantime, Mr Bergman had contacted his longstanding finance broker, David Nolan, and provided him with the plans to redevelop the property. Mr Nolan used the title details and plans to obtain an ‘on-completion valuation’ of the property from one of Mr Bergman’s financiers, Australia and New Zealand Banking Group Limited (‘ANZ’). By email dated 4 October 2013, Mr Nolan informed Mr Bergman that ANZ had provided an on-completion valuation of $3.4 million and was prepared to lend a total of 75 per cent of that valuation on the security of the property. As Mr Bergman had borrowed $1.44 million from ANZ on an interest only basis to fund his purchase of the property, the maximum borrowing limit indicated by ANZ was $1.11 million to assist with the project. Mr Nolan’s email was obviously indicative in nature, and did not represent any form of formal approval from ANZ. He concluded his email to Mr Bergman in the following terms — ‘We will leave the matter with you and stay reactive to your next move.’ As appears below, Mr Bergman took no further steps to progress any application for finance until 1 August 2014.

In the meantime, the 2013 renewal date passed and the policy was issued on 21 December 2013 for the year ending 21 December 2014. Again, Mr Bergman did not sign another insurance Declaration for this renewal.

From about October 2013 until May 2014, Mr and Mrs Bergman wavered about going ahead with the project. In particular, Mr Bergman looked for alternative homes in the vicinity of the property which he could buy and move into as a family home, without the need to undertake the project. Mr Bergman gave evidence that, at this time, he was ‘very uncomfortable’ with going ahead with the project and commenced looking for properties up to a price of $2.5 million as a cheaper alternative than proceeding with the project, which would cost in the order of $3.5 million for both land and buildings. He located two alternative properties for a family home, but his wife did not agree they were suitable. She had particular objections to each of the properties identified.

Mr Bergman’s evidence that he was focussed on buying an alternative family home at the time of the 2013 renewal finds some support in an email chain between 11 and 13 December 2013, concerning his possible purchase of an investment property in Chaddesley Avenue. Mr Bergman received a copy of the section 32 statement from the real estate agent, sent a copy to Mr Nolan to see if he had any concerns concerning the property and, in the end, following discussion with his wife, determined not to proceed with a purchase of that property. He informed Mr Nolan by email dated 13 December 2013 that, following discussions with his wife, they were ‘[j]ust not comfortable taking this on before we know where [L]ynedoch is heading’.[2] The emphasised portion of Mr Bergman’s email demonstrates that the project had not been abandoned at that time, only one week before the 2013 renewal date.
[2]Emphasis added.

Mr Bergman gave evidence that, in December 2013, he also inspected a house in Labassa Grove, about 200 metres from the property. He said that it was a large two storey house in the right location and that he was ‘quite keen on that property to purchase it’ as an alternative family home. When he spoke with his wife about it, however, she wasn’t interested because the property was a late 80s style and ‘a bit dated’. If this property had been purchased, Mr Bergman said that he would have sold the property at Lynedoch Avenue and kept the current family home as a rental property as an investment.

Next, in May 2014, Mr Bergman inspected a house in Orrong Road, about 50 metres from the property. He thought it was ‘a great family home’ and that his wife would think so too. However, Mrs Bergman rejected the Orrong Road property as an alternative residence because she was adamant that she did not want to live on a main road. In the end, Mr Bergman had no choice but to withdraw his interest in the Orrong Road property because, in his own words, he ‘wasn’t about to go and buy a house that [his] wife was not happy with’.

Taking the evidence as a whole I find that, at the 2013 renewal date, the project was ‘on hold’ while Mr Bergman considered purchasing an alternative property for the family home. As appears below, the evidence as to subsequent events is also consistent with the project remaining ‘on hold’ until May 2014.

Mr Bergman did not complete an insurance proposal as part of the 2013 renewal process. Rather, he was simply issued with an invoice for the premium for the 2013/2014 policy period by Midas. The renewal invoice did, however, contain a ‘DUTY OF DISCLOSURE’ section. That section included the following statements:
DUTY OF DISCLOSURE
What you need to tell us.
A renewal of insurance is a new insurance contract and you are required to tell us anything that you know or should know could affect our decision to insure you. If you do not tell us this information, we can reduce the amount of a claim, or we can treat your policy as if it never existed.
If you answer ‘yes’ to any of the following questions, please contact our agent or your broker.
In the last 12 months:
(1) …
(4)Are there any other material facts which should be disclosed?
(Please refer to the duty of disclosure section in your policy booklet.)[3]
[3]Emphasis added.

Mr Bergman gave evidence that he could not specifically recall reading the duty of disclosure section of the 2013 renewal invoice. When asked in his evidence in chief why he had not disclosed to the defendant that he had obtained a demolition permit in the last 12 months, Mr Bergman first gave an answer as to why he does not now believe the demolition permit was a relevant matter to disclose, but then said he gave no consideration at all as to whether the demolition permit should be disclosed:

Did you inform CGU that you had obtained or someone on your behalf had obtained a demolition permit?---No.
Why not?---I didn’t think it was relevant. I was broadly aware of a duty of disclosure that required me to tell insurers if there was anything material they needed to know about, and I didn’t pay much attention to the demolition permit at all. It was something by the by that Brad had received and it certainly wasn’t something I thought that I needed to tell an insurer. It didn’t even enter my mind, to be honest.[4]

[4]Emphasis added.

Mr Bergman gave a similar form of response to a question asking why he did not disclose the general existence of the project to the defendant at the time of the 2013 renewal:

Why not?---Because at that — well, I didn’t think it was relevant to tell an insurer about some plans, certainly if those plans were unlikely to go ahead. So it didn’t enter my mind, to be honest, that that might be something that an insurer would want to know about.[5]

[5]Emphasis added.

By email dated 3 March 2014 from Mr Bergman to Mr Nash, Mr Bergman asked Mr Nash to give him the plans and other documents for the project, but told Mr Nash that ‘things [were] still on hold.’

During March, April and May 2014, I infer that Mr and Mrs Bergman discussed the plans and costing of the project as originally designed. While remaining undecided as to whether or not to proceed with the project, rather than purchase an alternative property, by email sent 11 May 2014 they asked Mr Nash ‘to explore the possibility of revising the plans to make it so that we can build straight away.’ Mrs Bergman’s 11 May email to Mr Nash with this request is an important document and I will quote extensively from it:

Ari and I have been discussing what to do with the Lynedoch property and have started looking around at other houses. After a long weekend discussing it we’re still somewhat undecided what to do. We really love the block and the house we’ve designed — but the reality is that right now it’s way over our budget and we don’t know when we could afford to build it.
Since we are keen to move on from this house we are in now, and our preference is to build on Lynedoch rather than look at a cheaper option (ie buying something else) we wanted to explore the possibility of revising the plans to make it so that we can build straight away. This would mean a massive cut in the budget (putting the house in the $750-$800,000 range). Obviously this would mean big changes to the plans but I’m prepared for that with a more realistic approach. I will let you and Ari discuss the money side of things more but I just wanted to touch base with you to let you know where we are at. Ari was planning on having a chat to Ross [Larmer] about this soon — but we also wanted your thoughts on how possible it is to build something somewhat similar (if not smaller and cheaper for lack of a better word) for the price range I mentioned.
Anyway, be in touch soon![6]

[6]Emphasis added.

Mrs Bergman sent this email on the same afternoon that she and her husband decided not to purchase the Orrong Road property.

Mr Nash then arranged to have revised plans drawn in accordance with this email. Following meetings with Mrs Bergman, Mr Nash forwarded a copy of the revised plans to Mrs Bergman on 7 July 2014. Mrs Bergman responded that she generally agreed with the revised plans:

Excited about house. Looking good. Happy to proceed with these plans with revision to guest room.
Regards, Esther

Soon afterwards, on 1 August 2014, Mr Bergman sent an email to Mr Nolan concerning finance for the project. This was the first communication on that topic since October 2013. Mr Bergman informed Mr Nolan that he and his wife were ‘getting ready (finally) to start rolling on the building project’, and asked him to ‘please prepare finance arrangements (and let me know what I need to give you)’.

Mr Nolan responded promptly to Mr Bergman’s email. By email to Mr Bergman dated 4 August 2014, he set out a recommended strategy for Mr Bergman to obtain the necessary finance. A critical part of that strategy was the provision by Mr Bergman of a detailed list of required information including, in particular, proof of Mr Bergman’s personal income — from both his employment and from other sources, including directors fees from a private company under his control. The information sought included Mr Bergman’s personal tax returns and ATO assessment notices for the financial years ended 30 June 2012 and 2013, and a copy of his 30 June 2014 group certificate. In oral evidence, Mr Nolan described his list of required information as ‘the master list we would require to be able to consider a loan application’. He said that the master list in his email to Mr Bergman was prepared by him based on his experience in assisting Mr Bergman with other finance applications and his resulting general knowledge of Mr Bergman’s affairs.

Mr Bergman and Mr Nolan discussed Mr Nolan’s request for information in his 4 August 2014 email. Each of them said that he could not recall the discussion or anything said during it. It is apparent, however, from Mr Nolan’s 6 August 2014 email to Mr Bergman that the discussion concerned Mr Bergman providing less information than had been requested (‘revised information’) to enable Mr Nolan to assess Mr Bergman’s ‘maximum borrowing capacity and find [the] lowest cost lender from [an] informal tender of the transaction’.[7] Reading Mr Nolan’s email as a whole, I infer that the discussion between him and Mr Bergman involved Mr Nolan obtaining, on the faith of the lesser information, indicative offers from financiers short of formal loan offers. Mr Nolan’s evidence supports this inference: ‘It wasn’t what would be required to submit with a loan application. It was a shortcut to try and give an opinion, if you like.’ Further, Mr Nolan said, and I accept, that he would be unable to obtain a formal offer of finance for Mr Bergman until Mr Bergman had provided his 2012 and 2013 tax returns. At this time, the 2012 and 2013 tax returns had not been finalised or lodged with the ATO.
[7]Emphasis added.

During the following two weeks, Mr Bergman and Mr Nolan exchanged emails and, from the content of those emails and subsequent emails, I infer discussed progression of the information required by Mr Nolan to obtain indicative finance quotes. By email dated 19 August 2014, Mr Nolan posed further questions to Mr Bergman about the structuring of his debt and possible amendments to that structure to increase the tax deductibility of interest payable. Mr Bergman responded with his comments on the same day and, in the course of doing so, informed Mr Nolan that he had by that time received the ‘final 2012 tax returns’ and that he hoped to lodge the 2013 and 2014 tax returns ‘soon’.

Mr Nolan and Mr Bergman exchanged further emails about the proposed restructuring of Mr Bergman’s debt on 20 and 28 August 2014. Reading those emails as a whole, it is clear that the proposed debt restructuring was to assist with obtaining finance for the project by satisfying a lender that Mr Bergman had the capacity to repay a loan of $1 million to complete the project.

In August 2014, Mr Bergman gave notice to the tenant that he should vacate the property by 15 September 2014. I infer that the purpose of giving notice to the tenant was to prepare for demolition of the buildings on the property to enable the project to proceed. At this time, Mr Bergman was yet to receive any costings for the revised building works.

By 1 September 2014, Mr Cartwright and Mr Simon of Blueprint became involved in arranging demolition of the buildings at the property. There is no direct evidence as to who instructed Blueprint to arrange demolition, but I infer that it was either Mr or Mrs Bergman. Mr Cartwright wrote to Philip Kalafatis of P K Demolitions, who had provided a quote in July 2013 to demolish the buildings for $21,560, and informed him that the demolition was ‘now getting going’, the tenants were leaving on 15 September 2014 and that demolition was to be ‘as soon as possible after’. Mr Cartwright also enquired of Mr Kalafatis about the process for disconnecting the services to the property in anticipation of demolition. Mr Kalafatis responded that the demolition permit was to expire on 4 September 2014 and would need to be extended, that abolishment of the services to the property should be done on application by the owners or their representatives, and that his costs had increased and an updated quotation would be provided. There was no evidence of any updated quotation. On the same day, Mr Kalafatis applied for an extension of the demolition permit. The extended permit was issued by the building surveyor on 4 September 2014, and required demolition to commence by 4 September 2015.

By email dated 2 September 2014, Mr Bergman asked Mr Nolan to ‘confirm status of finance as I need this finalised asap so we can start building’. At this time, Mr Nolan was in Darwin for an extended time on a personal matter relating to illness of a parent and was behind in his work. He gave evidence that he did not prioritise Mr Bergman’s application because he still did not have all of the information and Mr Bergman had, in any event, been ‘in and out of this deal’.

On 2 September 2014, Mr Larmer provided a building quote for the revised project, in the sum of $889,178. He noted that some items were not included. Mr Bergman said in cross-examination that, at the time of the fire, he had not had a full opportunity to review the revised quotation closely, including comparing the prices with the prior quotation, and that he had not signed a building contract. There is no evidence of a building contract having been concluded with Mr Larmer at the time of the fire.

Also on 2 September 2014, Mr Nash sent an email to Mr and Mrs Bergman, in which he estimated that the total cost of the revised project would, allowing for the items excluded in the quote, contingencies, and amounts spent to date, be approximately $1.38 million. He advised them to instruct Mr Nolan to seek finance for that amount.

Mr Bergman could not recall if he discussed this email with Mr Nash. Mr Nash was not called as a witness. In any event, Mr Nash sent Mr and Mrs Bergman a further revised cost plan for the revised project by email dated 11 September 2014. Mr Nash copied the email to Mr Nolan. His revised cost plan included some additional works, upgraded finishes, the swimming pool and external works. In all, Mr Nash estimated a total cost for the revised project of about $1.5 million. He recommended that Mr Bergman’s finance application ‘adopt this amount as a minimum’.

The revised cost estimate discloses that Mr Bergman had spent $67,760 on the project to that time.

Mr Bergman gave evidence that the $1.5 million cost estimate made him feel ‘nervous’ about the project, as it was more than he had originally planned to spend on the project before revision. However, notwithstanding that he felt ‘nervous about things’, he agreed that he continued to press Mr Nolan to obtain finance for the revised sum. He denied in cross-examination that this was because he was committed to the project by reason of the amount he had already spent, on the basis that, including the cost of the land:

this project was a project in the order of 3 to $3.5 million and, given the context, I did take the view that I was willing to spend certain costs along the process, not knowing that we might actually end up going ahead. There was often talk about the fact that even if we wanted to sell it, we could sell it with plans or other things. So I did take the view that if, as I have given evidence already, certain of these costs would have been expended to date, I knew that that was money that would have been thrown away.[8]

[8]Emphasis added.

I accept that evidence.

Mr Nolan gave evidence to the general effect that, when informed of the increased cost of the revised building works, Mr Bergman’s finance application was ‘back to where we started from’ in respect of the original project. He gave evidence that he was sceptical about Mr Bergman’s ability to obtain finance in that sum. He did not, however, advise Mr Bergman of his scepticism.

Mr Bergman continued to press Mr Nolan for advice about his finance application. By email dated 15 September 2014, addressed to Mr Nash, but copied to Mr Nolan and Mrs Bergman, Mr Bergman asked Mr Nolan:

Where is the proposal[?]. Tenants have left, but I won’t arrange demolition without finance (and ANZ will need to be notified anyway).
Please arrange.[9]

[9]Emphasis added

Mr Bergman gave evidence that he was expecting ‘effectively an approval from a bank or something that [he] could rely upon … to proceed if that’s what we wanted to do’. Mr Nolan gave evidence that he had still not put any proposal together, because he was well behind in his work.

I infer that, by this time, Mr and Mrs Bergman were becoming impatient at Mr Nolan’s lack of progress. The following day, 16 September 2014, Mrs Bergman emailed her husband and, in apparent exasperation, asked him: ‘Any news on finance yet? Has [Mr Nolan] come through yet?’ In these circumstances, Mr Bergman enlisted Mr Nash to press Mr Nolan for some action. Mr Nash spoke with Mr Nolan in the afternoon on 16 September 2014. Mr Nash reported his conversation with Mr Nolan to Mr and Mrs Bergman by email that evening. The email is an important one and I will set it out in full:

I spoke with Nolan this afternoon.
He will issue a checklist of things he needs [from] you to finalise the finance. I understand it’s a similar list to what he sent some time ago. I explained that you seek to borrow the circa $1.5M as per our cost report with a view to having circa $[200,000] head room. The head room is in the deferral of pool and the intention not to spend the 10% contingency fund. He is 100% comfortable with obtaining finance to $1.5M. We will need to act quickly on his request which I understand include having your tax up to date? … anyway stay tuned and I will keep talking with him.
I spoke with ross larmer today; have received a fax with some further figures and will move now to preparing contracts for execution.
I haven’t spoken with my guys but understand they [were] on site today to secure property. We have the form from authorities for disconnection and will be in touch with Ari tomoro [sic] to sign where required.[10]

[10]Emphasis and punctuation added.

In his evidence in chief, Mr Bergman said that he recalled this email, had not brought his tax returns up to date at that time, did not receive the checklist from Mr Nolan before the fire on the following evening, and provided no further information to Mr Nolan before the fire. In cross-examination, Mr Bergman said he could not specifically recall this email (contrary to his evidence in chief) but was sure he had read it at the time. He agreed that, at this time, his belief as to whether he was going to get finance was a ‘really important matter’ in this proceeding. When it was put to him that he would have been comfortable that finance would be available, based on Mr Nash’s record of Mr Nolan’s statement that he was ‘100% comfortable with obtaining finance to $1.5M’, he disagreed:

I would have looked at that email and thought, ‘Well, that’s nice,’ and I will wait until the point I get finance.

Mr Nolan gave evidence that he recalled the conversation with Mr Nash:

My best recollection of the conversation was that Brad was ringing me to do Ari’s bidding because Ari would have been frustrated not to have got a proposal from us because he seemed in a hurry, and I remember Brad ringing to do his sort of bidding, I guess, for want of a better phrase, and for me lamenting that I was still waiting on financial information, which was always a battle with Ari. Ari was always very slow and you repeatedly asked him for the list of information and he still at this stage was pushing me and I hadn’t received anything. It was like extremely frustrating to be asked to do something but I couldn’t do it because I didn’t have the information to start my processes.[11]

[11]Emphasis added.

Mr Nolan denied that he told Mr Nash he was ‘100% comfortable with obtaining finance to $1.5M’, and gave reasons why he would not have done so:

Is that something you said to Mr Nash on that day?---No, I didn’t, and I wouldn’t.
Why wouldn’t you?---Because I hadn’t done the process, and when you look at Ari’s numbers he was always chasing income. He never had sufficient income to do what he wanted to do. He was sort of on the limit of borrowing capacity in our mind and we never give a commitment if we haven’t done the process because we didn’t know what his income profile was and how that would be represented to a lender to verify he had the income to do the deal. So, just on that he had the capital part right in terms of his borrowing ratios were fine, in terms of he had enough capital to do the deal, but the other part you are constrained by when we do deals is income and we always had a battle with his income. So I wouldn’t have said that because 1.5 was about half a million more than what Ari was talking and I was still sort of digesting that when the costed figure had gone up and he still hadn’t delivered his income to us.

Specifically, Mr Nolan said that he was still ‘missing’ Mr Bergman’s tax returns, which were ‘pivotal’ documents because his salary income was insufficient to service a loan for $1.5 million. He had not at that time even prepared a loan application to submit to any financial institution, and had not obtained any indicative approval of finance for Mr Bergman up to a level of $1.5 million. He concluded his evidence in chief by stating that, in his view, Mr Bergman would not have obtained that level of finance:

I formed a view that with the level of debt that he had, that he referred to when he said he wanted 3.5 million in that email, that he just couldn’t afford it on his income. He wouldn’t have qualified. After doing so many loans, you get a feel for when people can or can’t qualify for loans, and his income was short. So I didn’t think we were going to get the loan for what he wanted.[12]

[12]Emphasis added.

In cross-examination, Mr Nolan agreed that, notwithstanding that Mr Bergman was pushing him to make an urgent decision, he did not inform Mr Bergman of that view at any time before the fire. Further, Mr Nolan confirmed his evidence in chief that he did not inform Mr Nash, or give him the impression, that he was ‘100% comfortable with obtaining finance to $1.5M’. He maintained that he told Mr Nash that he was still waiting for information from Mr Bergman before he could offer an opinion about the likelihood of him obtaining the required finance:

I remember the conversation — lamenting that I hadn’t received the information, I’d requested it repeatedly, I still hadn’t received it and everyone is pushing us for an answer on making a loan application and we still haven’t got what we asked for. That was our position and I remember lamenting that very carefully and eloquently to Brad.
But the question I asked you was did you say anything about the likelihood of finance being of the level that they required being available?---No, I didn’t give an opinion because we couldn’t form one. That was the bottom line.

But wasn’t he pressing you for some information about the availability of the money?---I didn’t feel in that conversation he was [pressing me] for an opinion as to the availability of the money. It was more discussion about the process of ‘Where are you at?’[13]

[13]Emphasis added.

Later in cross-examination, Mr Nolan said:

I didn’t tell [Mr Nash] anything comfortable. I can recall that he was ringing me and I recall that I was asking - I was just saying we haven’t received the information, so I can’t go forward unless I receive the information. It’s something that happens to us quite a lot in other applications.[14]

[14]Emphasis added.

At 5:31 pm on 16 September 2014, Mr Simon emailed Mr and Mrs Bergman to arrange for Mr Bergman to sign the necessary ‘abolishment forms for the gas and electricity’ at the premises. He informed them that these forms needed to be completed before demolition could commence.

The fire occurred on the evening of 17 September 2014. The following relevant events occurred during the day:

(1) 17 September 2014, 9:27 am. An application form was sent by facsimile to the Glen Eira Council, seeking to allow the opening and reinstatement of the footpath and nature strip at the property ‘for electrical pit/conduiting works’. This application was filed by All Trenching & Boring Services as agent for Mr Bergman. I infer that it was submitted to the council at the request of Blueprint. The includes Mr Bergman’s signature, but he could not recall the application at all and said he did not think it was in fact his signature. Whether or not it was his signature, it is clear that this was a step taken by Blueprint towards preparation of the property for the building works as part of the project. I infer that Blueprint had authority from Mr Bergman to take that step.

(2) 17 September 2014, 1:03 pm. Mr Bergman sent an email to Mr Nash, with copies to his wife and Mr Nolan, in the following terms:

Hi all
I spoke to [N]olan — sending through proposal tonight — will need to send a few last bits — hopefully approved early next week.
Ari

(a) Mr Bergman was not asked about this email in his evidence in chief. In cross-examination, he said that he could not recall the conversation with Mr Nolan referred to in his email. He was pressed on his failure to recall this conversation and responded that he was not trying to evade the question, he could simply not recall the conversation. He agreed that the tone of the email was that only a small amount of extra information was required by Mr Nolan before sending through a proposal that evening.

(b) Nor was Mr Nolan asked about this email in his examination in chief. From his answers in cross-examination, it is difficult to discern the extent to which he recalls the conversation and the extent to which he was reconstructing it from the terms of the email and his usual practice. He said that he ‘would not’ have been so optimistic in the conversation as to tell Mr Bergman that, subject to receiving the ‘few last bits’ of information, finance would be ‘hopefully approved early next week’. Mr Nolan acknowledged that Mr Bergman was by this time pressing him:

(i) for a finance proposal, but maintained that he ‘would have’ given Mr Bergman the same answer he gives everyone else in such circumstances — ‘until you give me all the [information], I can’t assess it’; and

(ii) as to whether finance approval was likely, but maintained that he ‘would have told [Mr Bergman] that [he] needed the information with which to assess [the finance application] because he was just not providing it’.

(3) 17 September 2014, 3:18 pm. Mr Bergman’s secretary returned the signed abolishment forms to Mr Simon of Blueprint.

(4) 17 September 2014, 3:43 pm. Mrs Bergman emailed her husband, Mr Nash and Mr Nolan in response to Mr Bergman’s email at 1:03 pm, stating: ‘Great. Looking forward to demolition!’

(5) 17 September 2014, 5:03 pm. Mr Simon of Blueprint lodged the abolishment form in respect of gas supply to the property with the relevant power company. In his covering email, which was copied to Mr and Mrs Bergman, Mr Simon informed the energy company that the gas services at the property were to be abolished ‘at the mains as we are preparing to demolish the existing [buildings at the] property.’[15] Mr Simon did not lodge the application for abolishment of the electricity supply to the property on 17 September, and there was no point in him doing so after the fire.

(6) 17 September 2014, 6:38 pm. Mr Bergman telephoned the tenant and told him that the buildings at the property were on fire. At this time, the property had been vacant for two days.

[15]Original emphasis.

Mr Bergman gave evidence that, notwithstanding the above steps to prepare the property for demolition of the buildings, there were a number of things to be done before he would have authorised demolition. First, he said that the plans for the revised building works needed to be completed and signed off. Second, he needed to sign a building contract. Third, and most importantly, he said that he would not have authorised demolition unless and until he had secured a formal offer of finance for the amount required to complete the project — by that stage $1.5 million, as advised by Mr Nash.

Before considering Mr Bergman’s evidence as to the matters which might have provided reasons for him not to authorise demolition, it is necessary to consider whether Mr Nolan’s evidence that he did not advise, or would not have advised, Mr Nash or Mr Bergman that the necessary finance was likely to be obtained in the near future — in his words that he ‘didn’t tell [Mr Nash] anything comfortable’ and ‘would have’ given Mr Bergman ‘the same answer he gives everyone else’ in such circumstances — should be accepted.

For the following reasons, I do not accept Mr Nolan’s evidence.

First, it is inconsistent with two contemporaneous emails:

(1) Mr Nash’s email to Mr and Mrs Bergman following his conversation with Mr Nolan on 16 September 2014, in which he recorded Mr Nolan as having told him that he was ‘100% comfortable with obtaining finance to $1.5M.’

(2) Mr Bergman’s email to Mr Nash, following Mr Bergman’s further conversation with Mr Nolan on 17 September 2014, in which he recorded that Mr Nolan had told him that he was ‘sending through [a] proposal tonight’, that Mr Bergman needed to send him ‘a few last bits’, and that finance would ‘hopefully [be] approved early next week’.

There is no apparent reason why Mr Nash or Mr Bergman would incorrectly record statements made by Mr Nolan to them on the day of their respective emails. The statements attributed to Mr Nolan are clearly consistent with him having given comfort to Mr Nash and Mr Bergman that finance would likely be obtained.

Second, Mr Nolan did not inform Mr Bergman or Mr Nash of his view that finance was unlikely to be approved for the project. It is implausible that he would not have done so if that was his view, given that Mr Bergman was ‘frustrated’ at his delay in providing a finance proposal, that Mr Bergman ‘seemed in a hurry’, that in these circumstances Mr Bergman enlisted Mr Nash to do his ‘bidding’ and that, by the time he spoke with Mr Bergman on 17 September 2014, he acknowledges that Mr Bergman was pressing him for a finance proposal and an opinion as to whether finance approval was likely. In these circumstances, I reject Mr Nolan’s evidence that he was of the view that finance would not be obtained. If that was his view, and given the pressure being placed upon him at a time he was very busy, he would likely have informed Mr Bergman of his opinion. As he did not do so, it is more likely than not that he gave both Mr Nash and Mr Bergman the comfort they were seeking — by the statements recorded in their respective emails.

Third, taking Mr Nolan’s evidence as a whole, I am not satisfied that he is likely to have a good memory of the conversations, which took place during the course of a busy finance broking practice and at a period where he was behind in his work and under personal pressures. In the absence of contemporaneous notes or other documents to support his evidence, his version of events is improbable reconstruction in the face of the contemporaneous emails to contrary effect.

Fourth, Mr Nash was not called by the plaintiff as a witness. I infer that his evidence would not have assisted the plaintiff’s case on the finance issue and other issues.

The question remains as to whether Mr Bergman would, on the balance of probabilities, have proceeded to demolish the buildings on the property if the fire had not occurred. For the following reasons, I find that he would have.

The evidence discloses that, at the time of the fire:

(1) Mr Bergman had given notice to his tenant in mid-August, to enable the demolition to proceed. The tenant and his sub-tenants vacated the property on or before 15 September 2014.

(2) Mrs Bergman was extremely keen to proceed with the project and was pressing for demolition.

(3) Mr Bergman had building plans and pricing.

(4) Mr Bergman’s agents had taken the steps toward demolition described above.

(5) Although no building contract had been signed, I infer that that would not have presented any particular difficulty given the amended plans and pricing existed. I infer that there were no contentious matters outstanding on either front, as there is no evidence of them and the preparatory steps towards demolition are inconsistent with any major obstacles being in place.

(6) Although a formal offer of finance had not been received, Mr Bergman had received the comforting statements from Mr Nolan described above — indirectly through Mr Nash and directly to him as recorded in the two emails.

(7) Mr Bergman’s 15 September 2014 email to Mr Nolan, in which he stated that he ‘[would not] arrange demolition without finance’ is in my view inconsistent with the preparatory steps in fact taken towards demolition. Moreover, Mr Bergman’s statement was made in the context of him, personally and through Mr Nash, pressuring Mr Nolan to provide him with a finance proposal in a hurry. That pressure resulted in Mr Nolan’s comforting statement as recorded in the two emails.

Taking the evidence as a whole, I find, on the balance of probabilities, that Mr Bergman would have authorised demolition of the buildings at the property if the fire had not occurred, notwithstanding that he did not have a final building contract or finance commitment. This finding does not mean that he would have proceeded with signing a building contract without having finance approved. It is unnecessary to make that finding. All that was involved was the relatively minor cost of demolition, in the context of a large project on which Mr Bergman had already spent $67,760. Had he spent a further $25,000 or thereabouts on demolition,[16] and finance was then not obtained, I infer those costs would have been within the amount he was, in his own words, ‘willing to spend … along the process’, notwithstanding that it was possible the project might not proceed.
[16]The previous demolition quote for $21,560 was being reviewed.

Further, although not necessary for my conclusion on this issue, I infer that demolition of the buildings would not have substantially devalued the property, if at all, if finance was not obtained or Mr Bergman determined not to proceed with the project for some other reason. Given the condition of the buildings and the standard of fittings, as shown in photographs before and after the fire, and given the property’s value, the property was ripe for development. Mr Bergman had purchased the property for the purpose of a building project and I infer that any other purchaser would be likely to purchase it for a similar purpose.

Following the fire, however, Mr Bergman consulted the terms of his insurance policy and decided to cancel the planned demolition and, instead, to make a claim that the defendant pay the costs of reinstating the buildings in accordance with the terms of the policy.

I proceed to consider the issues for determination.

What was the plaintiff’s intention regarding demolition at the 2013 renewal date?

At the inception of the initial policy, Mr Bergman intended to proceed with the project once he had settled on the plans, secured the necessary finance and entered into a building contract. Although subject to those contingencies, which may be described as the usual contingencies of such a project, he obviously had sufficient confidence in his ability to deal with them that he had purchased the property for a total cost of about $2 million with very substantial debt and little rental income to defray the interest on that debt. The following facts support these conclusions:

(1) In Mr Bergman’s own words, he purchased the property ‘as a building project’. That building project was to provide him and his family with an alternative principal place of residence to their existing home, which was in an inconvenient location. Mr Bergman described his purpose in purchasing the property in the following terms:

It’s the reason we bought the Lynedoch property. Because on the Sabbath we have to walk, we can’t drive, and that’s the community I’m in. So in terms of family or synagogues and kids going to friends’ houses and other things, it’s a big benefit to be right in that area. So we really were focused on a very narrow area to buy a property.

(2) Mr Bergman’s reference in the above answer to ‘we really were focussed’ was a reference to him and his wife.

(3) Mr Bergman agreed in cross-examination that, at the time he purchased the property, he, and I infer his wife, were ‘looking to move to Lynedoch as soon as [they] conveniently could’.

(4) Mr Bergman acknowledged in cross-examination that the project necessarily involved demolition of the buildings at the property. Although Mr Bergman made passing reference in his evidence to the possibility of renovating the existing buildings on the property to a standard suitable for his family to live in as their principal place of residence, there is no evidence to support that suggestion as a real possibility which he considered at any time. There is no document to support such an intention, I infer, from the evidence of her conduct and her emails, that his wife would have been firmly against it and, when the initial house design proved too expensive, his, and his wife’s, response was to downsize the proposed new home rather than renovate the existing one.

(5) Mr Bergman also endeavoured to downplay the project as being the sole purpose of his purchasing the property by referring to the property as being ‘attractive’ as a rental property. I reject that evidence. From an investment viewpoint, the rental on the property was so low (only $700 per week) that continued ownership of the property as a rental property was, as he agreed in cross-examination, a ‘financial millstone around [his] neck’. Moreover, the lease to the proprietor of the rooming house was for only three months, and then on a month-to-month basis. Mr Bergman said that he did not grant a longer lease: ‘because we wanted the flexibility with the lease so that if we decided to go ahead and develop the property we would have the ability to ask the tenant to leave.’ The ‘we’ was, I infer, Mr Bergman and his wife.

(6) As appears above, soon after he purchased the property, Mr Bergman sent an email to Mr Nash, referring to previous discussions and his purchase of the property. He asked Mr Nash to look at the property with him for the purpose of discussing the project.

In 2013, Mr Bergman took a number of steps towards implementing the project, including progressing the necessary element of demolishing the buildings at the property. Taking the evidence as a whole and my findings above, however, I find that Mr Bergman’s intention regarding the project at the 2013 renewal date was that the project was ‘on hold’ while he considered the possibility he might find and purchase an alternative residence for his family which was both acceptable to his wife and in the same narrow area as the property. As evidenced by his 13 December 2014 email to Mr Nolan, Mr Bergman had not abandoned the project altogether at the 2013 renewal date, and the prospect that he would proceed with it in the policy period therefore remained.

Was the plaintiff’s failure to disclose his intention regarding demolition at the 2013 renewal date a relevant non-disclosure?

Section 21(1) of the Act provides:

21 The insured’s duty of disclosure
(1)Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
(a)the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
(b)a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to:
(i)the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and
(ii)the class of persons who would ordinarily be expected to apply for insurance cover of that kind.

I will refer to matters ‘relevant to the decision of the insurer whether to accept the risk and, if so, on what terms’ as matters ‘relevant to the risk’. Section 21(1) imposes a duty on a proposed insured to disclose such matters when they are known or a reasonable person in the circumstances could be expected to know they are relevant to the risk.

Relevance of demolition plans or orders

I find that existing statutory orders or existing plans to demolish insured buildings are relevant to the risk. That is common sense and is supported by evidence, as set out below.

First, a property owner is likely to spend less money to maintain a rental property which he is required, or intends, to demolish. This may lead to lack of proper maintenance or, where required, a failure to replace (among other things): (1) faulty electrical wiring or gas pipes, or fixed appliances such as hot water services or ovens, which will obviously increase the risk of fire damage; or (2) a leaking roof, which will obviously increase the risk of water damage.

Second, any period of vacancy while a property is being prepared for demolition will increase the risk of vandalism of whatever kind — especially where the buildings are derelict or not properly maintained.

Third, the defendant’s 2012 underwriting guidelines which were in place at the renewal date contain detailed information and directions to officers responsible for accepting risk, which clearly indicate that demolition is relevant to the risk. Paragraph 3.1 states:

The following risks are unacceptable:
…
· Buildings that are not well-maintained, structurally sound and secured against wind and rain (i.e. gutters, stumping, wiring, plumbing, roof, balcony, balcony railing, floorboards, etc). E.g. Buildings in a state of disrepair.
· Property subject to any demolition plans or statutory orders.[17]

[17]Emphasis added. The defendant’s 2010 underwriting guidelines in place at inception of the policy were in substantially the same form in this regard: see paragraphs 2.2.3 and 2.2.10.

The reference to ‘any demolition plans’ is broad. In my opinion, the phrase captures any plan to demolish,[18] including any existing ‘project’ or ‘scheme’ of the proposed insured to demolish in the future; and any reasonable underwriting officer would have no difficulty in understanding that this is so.
[18]See, Macquarie Dictionary, 6^th ed, ‘plan’.

Fourth, the defendant called evidence from its officers to support the above matters.

Evidence was called from Mark Brown, a team manager in the defendant’s national ‘personal insurance underwriting centre’. That centre is responsible for home insurance, landlord’s insurance, motor insurance and other insurance products. No objection was taken to Mr Brown’s experience and ability to describe the defendant’s underwriting practices at material times.

The defendant also called Damian Parker, who worked for the defendant as an underwriter at relevant times. In particular, he was the defendant’s underwriting manager for landlord’s insurance at the 2013 renewal date.

Mr Brown gave evidence that the statement in the guidelines that properties ‘subject to any demolition plans or statutory orders’ are ‘unacceptable’ risks was a ‘blanket’ statement:

I wonder if I could ask you to, for example, go back to the guidelines … – that’s the 2012 guidelines. Then if we could take you in that document … to the heading at the top, ‘The following risks are unacceptable’, what does that mean in terms of these guidelines or the administration of these guidelines?---These are the, I suppose, blanket unacceptable risks to CGU. They are clear dot points and unacceptable risks for underwriters to refer to.

In cross-examination, Mr Brown agreed with the proposition that the demolition question was aligned with the underwriting guideline concerning properties subject to demolition plans or statutory orders:

So the question that is there is designed to, so far as you are concerned, pick up those properties that are subject to any demolition plans or statutory orders?---(Witness nods). Yes.
That’s correct?---(Witness nods).
I want to ask you about the content of those guidelines in that particular respect. Should I assume that from CGU’s point of view what they are concerned about is the fact that if a property is subject to demolition then, first, it might be because it’s been condemned by the council?---There are so many potential risk issues with insuring a property that’s under demolition. That would be one.
If it is under demolition the fact that it may be a condemned building is one of them?---Yes.
The fact that it may be a building that is open to the elements and thus in terrible repair is another one?---Poor condition would be one of them. With tenanted properties also[,] generally speaking a property that’s going to be demolished is not generally well maintained because obviously there’s not much point in maintaining a property.[19]

[19]Emphasis added.

Mr Parker’s evidence as to the relevance of demolition plans or statutory orders was to similar effect:

[With reference to the underwriting guidelines] The top of that page reads, ‘The following risks are unacceptable’, and I think the fourth dot point down is, ‘Properties subject to any demolition plans or statutory orders’?---Yes.
Do you have experience in the administration of these guidelines?---Yes.
Are you able to say whether, if a property was subject to demolition plans or statutory orders, the insurance of that property would or would not be accepted by [the defendant] in 2013?---Yes, it would not be accepted.
Or in 2010?---Not be accepted.
I take it, do I, they would not be accepted because as the documents indicate the risk is considered unacceptable?---That’s right.
Are you able to say of your own experience why it is that risks of properties of those descriptions are considered by CGU to be unacceptable?---Yes, there are a few reasons. One that I guess the value of the property is no longer what it was when it was — if that order wasn’t to be there because it is going to effectively be demolished. So the rebuilding costs aren’t quite what they were. And generally a property that’s under those kind of orders won’t have any people living in it or it will be dilapidated or be poor structure and poor quality which means we don’t want to take that risk on to our portfolio because the likelihood of extreme damage to it is too high for us to really give a relevant price.[20]

[20]Emphasis added.

Mr Parker was not cross-examined.

In my opinion, the evidence of Mr Brown and Mr Parker supports a finding that properties subject to existing demolition plans are relevant to the risk. I do not accept Mr Bergman’s contention that Mr Brown’s evidence about blanket unacceptable risks is limited to properties ‘under demolition’, and so did not include a proposed insured’s ‘demolition plans’, which are specifically mentioned in the guidelines to which Mr Brown referred. Nor do I accept his contention that Mr Parker’s references to ‘those kind of orders’ limits his earlier evidence that properties ‘subject to demolition plans’ would not have been accepted by the defendant in 2010, when the policy was first issued, or at the 2013 renewal date.

The evidence summarised in the factual narrative above demonstrates that, at the time he applied for the initial policy in December 2010, and for the renewals in 2011 and 2012, Mr Bergman’s current intention to proceed with the project was known to him. For the reasons given above, that intention was relevant to the risk.

Relevance of Mr Bergman’s intention

The question for determination, however, is whether Mr Bergman’s intention regarding the project at the 2013 renewal date was relevant to the risk and was required to be disclosed.

The renewal of the policy resulted in a fresh contract of insurance, rather than the extension of an existing contract.[21] Moreover, the 2013 renewal notice contained a ‘DUTY OF DISCLOSURE’ section which reinforced this position and informed Mr Bergman that he was ‘required’ to tell the defendant: ‘anything that you know or should know could affect our decision to insure you’. He was also referred to the ‘Duty of Disclosure’ section in the policy booklet. Accordingly, there was a fresh duty of disclosure at the 2013 renewal date, and Mr Bergman knew that was so.
[21]CE Heath Underwriting & Insurance (Aust) Pty Ltd v Edwards Dunlop & Co Ltd (1993) 176 CLR 535, 545–6.

I have found above that Mr Bergman had put the project ‘on hold’ at the 2013 renewal date while he looked for an alternative property to purchase in the narrow area where he and his wife wished to live. On this basis, it was contended on behalf of Mr Bergman that: (1) the Court should infer that the most likely outcome at the 2013 renewal date was that he would find and purchase another suitable home in the narrow area he and his wife wanted to live; (2) the property would be sold as it was without demolition first occurring; and (3) Mr Bergman was thus not required to disclose his intention regarding the project at this time. For the following reasons, I do not accept that contention.

First, as appears above, Mr Bergman’s sole intention in purchasing the property was to proceed with the project — which necessarily involved demolition of the buildings. Although his enthusiasm for the project waxed and waned over the period from him purchasing the property until the 2013 renewal date, much of the preparatory work to enable the project to proceed had been done by October 2013. By that time, Mr Bergman had arranged for plans for the new home to be drawn and costed, authorised Mr Nash to obtain a demolition quote and demolition permit, and had engaged in detailed discussions with Mr Nolan about the best way to fund the project. While I accept that the project was ‘on hold’ from sometime in October 2013, I find that there was always a real, and not remote, prospect that he would proceed. In colloquial language, the project remained ‘on the cards’.

Second, the fact that the project was ‘on hold’ while Mr Bergman considered the cheaper option of purchasing an alternative family home does not, for the reasons given above, mean he had abandoned the project. In the absence of such abandonment, the prospect of demolition inherent in the project remained.

Third, although not necessary for my conclusion on this issue, my findings are bolstered by the fact Mr Bergman did not call his wife to give evidence. She could have given material evidence as to the status of the project as at the 2013 renewal date, in particular the likelihood that she would agree to abandoning the project in favour of purchasing an alternative home in the right location and for the right price. Taking the evidence as a whole, I find that Mrs Bergman’s views were likely to be a key factor in Mr Bergman’s decision as to whether or not to proceed with the project. For example, it was she who rejected the Orrong Road alternative home, and on the same day sent the 11 May 2014 email to Mr Nash which reactivated the project. I infer that her evidence, as to the likelihood that the project would proceed as at the 2013 renewal date would not have assisted Mr Bergman’s case.

For the above reasons, I find that the existence of the project, and the prospect that it would proceed, remained relevant to the risk at the 2013 renewal date, notwithstanding that the project was ‘on hold’ at that precise date. It would be artificial to find that the existence of the project ceased to be relevant to the risk while Mr Bergman continued to own the property in circumstances where: (1) it made no sense for him to keep it as an investment; (2) I reject his evidence that he ever considered renovating the property; and (3) he must therefore have retained the property to maintain the ability to proceed with the project if he could not find a suitable alternative property that he and his wife agreed to and were able to purchase.

Mr Bergman contends that a distinction should be drawn between buildings which are definitely to be demolished and the situation where buildings may be demolished upon the fulfilment of a number of contingencies. He contends that an intention to demolish in the future if those conditions were met was not relevant to the risk. I do not accept those contentions. In my opinion, the fact that an insured’s intention to demolish is subject to the occurrence of contingencies will not necessarily convert that intention into a mere possibility which could be considered irrelevant to the risk undertaken by the insurer. It will depend on the circumstances of the particular case, in particular the reasons for the planned demolition and the nature of the particular contingencies standing in the way.

As to the reasons for demolition, a case such as the present — where Mr and Mrs Bergman had a strong emotional attachment to the land on which the insured buildings are located, because the planned demolition was intended to provide a building site for their future family home in a particular location — may be contrasted with a planned demolition by a building developer, where only financial considerations are relevant to the decision to proceed.

As to the nature of the contingencies standing in the way of demolition, there may be mere hopes or expectations, outside the control or influence of the proposed insured, which might make the intended demolition irrelevant to the risk. For example, where the proposed insured has the mere hope or expectation that a fit and healthy relative will at some future time leave him or her a sufficient legacy in a will to enable a planned demolition and construction project to proceed. On the other hand, there are cases such as the present, where the intention to demolish and commence a re-building project is dependent upon the ordinary risks facing a person who purchases a residential property with a realistic intention of demolishing the existing buildings and building a new home. In such a case, as here, the proposed insured faces the usual contingencies of cost and delay associated with design of the new home, execution of a building contract, obtaining all necessary planning permissions and permits and arranging finance. In these circumstances, the intention to demolish is a real intention and not a mere possibility which may be irrelevant to the insurer’s risk. This is especially so where, as here, the proposed insured has taken significant steps to implement that intention.

It was also contended on behalf of Mr Bergman that any intention he had to demolish the building at some point in the future was incapable of being a ‘matter’ relevant to the risk. Reliance was placed on passages in the majority judgment in Perpetual Trustee Australia Ltd & Anor v FAI General Insurance Company Ltd (in liq),[22] and in the minority judgment.[23] In oral submissions, senior counsel for Mr Bergman submitted that these passages mean:

that when one is seeking to determine the question of any obligation to disclose a state of mind, an intention, a desire, one should first conclude; one, that that’s not a matter because it’s not a matter capable of objective ascertainment; and two, it’s not relevant directly to the risk because, as we say in paragraph 32 of our written submissions, the state of the plaintiff’s mind alone cannot mean that the house was exposed to more than ordinary danger from the risks insured against.

[22](2003) 214 CLR 514, 530–2 [28]–[33], 533–4 [36] (McHugh, Kirby and Callinan JJ).

[23]Ibid 542–4 [67]–[69] (Gummow and Hayne JJ).

I do not accept that the judgments in Perpetual Trustee v FAI stand for those propositions. The majority said only that, on the facts of that case, the insurer’s view of ‘commerciality’ of the contract of insurance was not relevant to the risk. They did not say that a proposed insured’s intention could never be relevant to the risk because it was incapable of objective ascertainment. Nor did the minority. In this case, for the reasons given, Mr Bergman’s intention regarding demolition was relevant to the risk.

Knowledge

Having determined that Mr Bergman’s intention regarding the project at the 2013 renewal date was relevant to the risk, s 21 of the Act requires the Court to consider whether Mr Bergman knew, or a reasonable person in the circumstances could be expected to know, that this was so.

The first issue is whether Mr Bergman’s evidence that it ‘didn’t enter [his] mind to be honest’ should be accepted. If so, he could not have known that it was relevant to the risk. It was not put to Mr Bergman that this evidence was false. Fraudulent non-disclosure was not pleaded or argued with reference to s 28(2) of the Act. In these circumstances, the defendant’s submission that Mr Bergman had actual knowledge must be rejected.

I find, however, that before entry into the initial policy and at each renewal date thereafter including the 2013 renewal date, a reasonable person in the same circumstances as Mr Bergman could be expected to have known that the prospect that the project, and thus demolition, would proceed was relevant to the risk. My reasons follow.

First, like Mr Bergman, a reasonable person in his position would have read the demolition question before signing the Declaration in connection with the initial policy. Mr Bergman agreed that he therefore knew at that time ‘that the question of whether the property was to be demolished in the future was a matter which was relevant to the insurer to know’. A reasonable person in his position could be expected to have reached the same conclusion and thus had the same knowledge.

Second, a reasonable person in Mr Bergman’s circumstances would have known that properties which are to be demolished carry with them a higher degree of risk, for the reasons given above. In that regard, Mr Bergman agreed in cross-examination with the general effect of Mr Parker’s evidence concerning increased risks which are consequent upon insurance of properties which are to be demolished.

Third, the reasonable person in Mr Bergman’s position would also have possessed all of Mr Bergman’s knowledge and associated intentions concerning the project. He would have purchased the property for the same reasons, for the same price and with the same debt, been in the same financial circumstances, let the property for use as a rooming house at a low rent (which decreased to $400 well before the 2013 renewal date), had a wife who wished to proceed with the project if possible, undertaken substantial steps to implement the project, and put the project ‘on hold’ for the same reasons as Mr Bergman. He would also know that finding an affordable alternative home in the relevant narrow area, which was suitable to both him and his wife and within his target price range, was no sure thing. In my opinion, a reasonable person in that position could be expected to know that the prospect of demolition in the future, including during the policy period, remained open, and was therefore relevant to the risk.

For the above reasons, I conclude that:

(1) the prospect that Mr Bergman would proceed with the project was relevant to the risk;

(2) a reasonable person in Mr Bergman’s position would have known that was so at the 2013 renewal date, and also before the initial policy was issued and at each previous renewal; and

(3) by failing to disclose the prospect that he would proceed with the project, he breached his duties under s 21(1) of the Act.

What is the meaning of the demolition question?

The demolition question is in the following terms:

Is the property undergoing renovations over $75,000, OR, under construction, OR, to be demolished?[24]

[24]Emphasis added.

Mr Bergman’s counsel contended in written submissions that, construed in the context of s 21 of the Act and the Declaration as a whole, the demolition question is:
… directed towards facts not intention as to future events … Any such intention [to demolish] could not be a matter relevant to risk, because the policy does not respond to intentional damage such as demolition.
Objectively construed, the question is directed to ascertaining the present status of the building: is it (presently) undergoing renovations, is it (presently) under construction or is it (presently) subject to demolition pursuant to order or other obligation or commitment.
…
Thus the demolition question must be understood to be enquiring as to whether the property is to be demolished in that it is definitely to be demolished in the imminent future.[25] The demolition question is not directed toward an insured’s intention as to the possibility[26] of demolition at some unknown time in the future.
[25]Emphasis added.
[26]Original emphasis.
In oral submissions, Mr Bergman’s counsel acknowledged that the demolition question was directed at an existing intention by a proposed insured to demolish in the immediate future, in the sense that the buildings on the property were then ‘slated for demolition’. He submitted that the demolition question was not directed at beliefs or predictions that demolition may occur at some future time, because if the question has that meaning: ‘unless you have consciously decided that you would never redevelop your property by demolishing the building, then you must answer ‘yes’ to this question’. I do not accept that contention.

First, the demolition question is plainly a wide question directed towards a variety of existing circumstances under which the property is either required to be demolished or the proposed insured intends to demolish it. Examples include: (1) demolition orders by statutory authorities, which require demolition of the buildings in the future; (2) where the proposed insured is contractually required to demolish the buildings; and (3) planned demolition in the future by the proposed insured.

Second, the question must be considered in the context of proposed property insurance, where plans or orders for demolition are, for the above reasons, relevant to the risk to be undertaken by the insurer.

Third, I do not accept that the demolition question is concerned only with an intention that the buildings on the property will ‘definitely be demolished in the imminent future’. The demolition question is unlimited in time. It does not ask whether the buildings are to be demolished during the policy period or by any specified time. So construed, the demolition question captures, for example, an existing compulsory acquisition order which will necessarily result in demolition when work on a road widening project, which is yet to commence, approaches the vicinity of the insured property. That time may be well outside the policy period.

Rejection of Mr Bergman’s case on the meaning of the demolition question makes it necessary to consider his contention that the Court should nevertheless attribute a meaning to the question in accordance with what he ‘apparently understood the question to mean’. In this regard, Mr Bergman relies upon s 23 of the Act, which relevantly provides:

23 Ambiguous questions
Where:
(a)a statement is made in answer to a question asked in relation to a proposed contract of insurance …; and
(b)a reasonable person in the circumstances would have understood the question to have the meaning that the person answering the question apparently understood it to have;

that meaning shall, in relation to the person who made the statement, be deemed to be the meaning of the question.[27]

[27]Emphasis added.

It was submitted on behalf of Mr Bergman that the correct approach to the interpretation and application of s 23 was set out by Young J in Advance (NSW) Insurance Agencies Pty Ltd & Anor v Matthews.[28] Young J summarised the approach to s 23 of the Act in the following terms:

In the light of sec. 23 of the Act, it seems to me that the Court goes through a fourfold process with respect to the construction of questions in a proposal for insurance as follows: First, the Court looks at the true construction of the words. Secondly, the Court asks whether the words are ambiguous, thirdly it asks what the insured apparently understood by the words and fourthly, it asks whether a reasonable person in the circumstances would have understood the question in the same way as the insured.[29]

[28](1987) 4 ANZ Insurance Cases 60-813, 74,994–5.

[29]Ibid 74,994.

In that case, Young J determined the meaning of question in the insurance proposal, held that the question was ambiguous and the insured apparently took the question to mean something other than its true meaning, but held that understanding was not that which a reasonable person in the circumstances would have understood the question to have.

In this case, for the reasons given above, the demolition question should be given its natural meaning. Accepting for the purposes of argument that the demolition question was ambiguous, however, I am not satisfied that Mr Bergman had any proven understanding, apparent or otherwise, of the question. In his evidence in chief, he said that he believed he read the questions and checked the content of the answers before he signed the Declaration. In cross-examination, he explained that he had no recollection of doing so but, because he signed the Declaration, it accorded with his ‘ordinary practice’ that he would have read the questions and checked the answers before signing. He could not specifically recall having read the demolition question or giving it any meaning. When it was put to him that he must have understood that the demolition question ‘addresses itself to the future of the property’, he answered:

No, it addresses itself to an immediacy, a future immediacy, not just the future in general.

Counsel for Mr Bergman contended that his understanding of the demolition question now, in terms of an inquiry about demolition as a ‘future immediacy’, is likely to be the understanding he had at the time he signed the Declaration and the Court should thus infer that was his apparent understanding when he signed the Declaration in December 2010. It was then contended that such an understanding was reasonable, as it would have been that of a reasonable person in Mr Bergman’s circumstances.

I do not accept that I should infer that Mr Bergman had that apparent understanding at the time he signed the Declaration. Mr Bergman is a highly qualified lawyer and experienced businessman, well capable of understanding the arguments put forward by his counsel to the Court. In my view, he was doing no more than arguing a case when he gave his evidence about a ‘future immediacy’. The evidence does not enable any finding to be made about his apparent understanding of the demolition question at the time he signed the Declaration. Nor, should it be relevant, does the evidence enable any finding that he had any particular understanding at the 2013 renewal date.

It follows that it is unnecessary to consider the fourth question contained in s 23, as to whether a reasonable person in Mr Bergman’s circumstances would have understood the demolition question in any particular way other than the plain meaning which I have given it on its proper interpretation as discussed above. In my opinion, however, a reasonable person in Mr Bergman’s position would not have understood the demolition question to be inquiring only about current demolition orders, existing obligations to demolish or Mr Bergman’s plans to demolish in the immediate future. For the reasons given above, the demolition question is not limited as to time.

For the above reasons, I conclude that the demolition question asked Mr Bergman whether there were existing circumstances under which the buildings on the property were required or intended to be demolished in the future.

Did the plaintiff’s answer to the demolition question contain a representation that he had no intention to demolish?

For the above reasons, I find that Mr Bergman’s answer (‘no’) to the demolition question contained a representation to the defendant that he had no existing intention to demolish the buildings on the property in the future.

Was that representation a misrepresentation at the time of the 2013 renewal?

For the above reasons, the representation by Mr Bergman was, at the time he signed the Declaration and at each renewal of the policy including at the 2013 renewal date, wrong. Accordingly, it was a misrepresentation when made and, if a continuing representation at the 2013 renewal date, a misrepresentation at that time also. For the following reasons, I find the representation was a continuing one at the 2013 renewal date.

Mr Bergman signed the Declaration prior to issue of the initial policy in December 2010. As appears above, the policy in question was a fresh policy issued at the 2013 renewal date. Mr Bergman did not sign another Declaration in connection with that policy. In these circumstances, does Mr Bergman’s answer to the demolition question in December 2010 constitute a misrepresentation to the defendant before the relevant policy was issued at the 2013 renewal date, so that s 28 of the Act applies to it?

This issue was argued by the parties by reference to the general law position, as if unaffected by the provisions of the Act. As appears below, the Act is also relevant and, in my view, consistent with the general law position.

The defendant relies on the general and unqualified statement by the learned authors of Sutton on Insurance Law that:

it is implicit in the decisions that the renewal of a policy is made on the basis that statements made by the insured in the original proposal are still accurate.[30]

[30]Thomson Reuters, 4^thed, Volume 1, 618–9 [7.940] and the authorities cited.

Counsel for Mr Bergman challenged the correctness of this general proposition on the basis that the authorities cited did not support the statement. Specifically, he contended that any such general proposition could not apply where the alleged misrepresentation concerns the intention of the insured.

Although not brought to the Court’s attention by either party, the learned authors of Sutton on Insurance Law have considered the specific question of whether a misrepresentation or non-disclosure of facts relevant to the risk in connection with an earlier policy is always impliedly repeated at subsequent renewals of the policy. In summary, the learned authors conclude that the general proposition quoted above is subject to the original misrepresentation or non-disclosure continuing to have effect.[31] This is especially so where statements or non-disclosures of intention are concerned.
[31]Ibid 622–3 [7.960].

The learned authors refer to two decisions in this regard. First, FAI v McSweeney & Ors,[32] a decision which supports the conclusion.
[32](1999) 10 ANZ Ins Cases 61–443 at 75,052–4.

Second, with specific reference to statements of intention, the learned authors cite the decision of the Court of Appeal in England in Limit No 2 Ltd v AXA Versicherung AG,[33] a case on which Mr Bergman’s counsel relied in his submissions. In that case, there was a representation in a reinsurance context, by brokers representing the insurers, as to the underwriting standards of the insurers at the time the reinsurance was proposed. The representation was classified as constituting the current underwriting practices of the insurers and their intention as to underwriting practices in the future. That representation was characterised as one of existing fact. The Court held that the initial reinsurance policy, and its extension which constituted a variation and not a fresh policy, could be avoided for misrepresentation because the insurers had not been applying the represented underwriting standards at the time the representation was made. The reinsurers were not, however, entitled to avoid the fresh policy following renewal of the extended initial policy because, in the words of Longmore LJ (Jackson and Ward LJJ agreeing):

A representation of intention cannot last forever; it only relates to the time when it is made; there must come a time when it is spent …[34]

[33][2009] Lloyd’s Rep I.R. 396.

[34]Ibid 403 [26].

On the particular facts of that case, Longmore LJ held that the representation of intention was ‘spent … well before’ the expiration of the initial policy as varied and extended. In reaching that conclusion, Longmore J was heavily influenced by:

how powerful the remedy of avoidance is in the hands of an insurer or reinsurer. The entirety of a contract can be avoided for a wholly innocent misrepresentation provided it is material to the risk in the eyes of a prudent underwriter … that is a very stark remedy. I do not, for my part, consider that a Court could struggle to hold that everything said at inception is to be impliedly repeated on renewal.[35]

[35]Ibid 403–4 [27].

I accept Longmore LJ’s statement that a representation of intention cannot last forever and, on the facts of a particular case, there will come a time when it is spent and cannot be relied upon as constituting a continuing representation at the time of a subsequent renewal. For the reasons I have given, I do not accept that the representation arising from Mr Bergman’s answer to the demolition question was ‘spent’ on the facts of this case before the 2013 renewal date. It was a continuing representation and therefore a misrepresentation at the 2013 renewal date, because it remained false and relevant to the risk.

Moreover, I note that Longmore LJ’s statements were made in a context which does not operate in Australia, where the right of an insurer to avoid a contract of insurance for misrepresentation is limited by s 28 of the Act to fraudulent misrepresentation and, in the absence of fraud, the lesser remedies under s 28(1) and (3) of the Act constitute the insurer’s exclusive rights: see s 33 of the Act. Accordingly, Australian courts may be more willing to find that a misrepresentation as to an existing fact continues on an insurance renewal. Each case must, of course, depend on its own facts.

Does s 28 of the Act apply to any such non-disclosure or misrepresentation?

Section 28 of the Act relevantly provides:

28 General insurance
(1)This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
(a)failed to comply with the duty of disclosure; or
(b)made a misrepresentation to the insurer before the contract was entered into;

but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
(2)If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
(3)If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

Non-disclosure

The first issue is whether, if Mr Bergman had disclosed the project and the prospect that he would proceed with it at the 2013 renewal date, the defendant would have issued the policy at all. In this regard, it is necessary to refer again to the evidence of Mr Brown and Mr Parker. As appears above, they gave evidence to the effect that properties subject to demolition plans were viewed by the defendant as ‘blanket unacceptable risks’. Mr Parker said that the defendant did not want to insure properties subject to such risks ‘because the likelihood of extreme damage to [such properties] is too high for us to really give a relevant price.’

Mr Bergman submits that the defendant failed to discharge the onus imposed on it by s 28 of the Act, on the basis that no evidence was led as to how the defendant would have responded to the facts of this case. I accept that the defendant had the onus of establishing its defence under s 28.[36] I do not, however, accept that the defendant failed to satisfy its onus. I accept the evidence of Mr Brown and Mr Parker that the defendant would not have issued any policy, either in 2010 when the initial policy was issued or at the 2013 renewal date, if Mr Bergman had disclosed the existence of the project and the prospect he would proceed with it.
[36]Manchester Unity Total Care Building Society v M.G.I.C.A. Ltd (1991) 6 ANZ Ins Cases 61–062 at 77,154–5.

As at the 2013 renewal date, the disclosure would have needed to include the facts that: (1) Mr Bergman’s purpose in purchasing the property was to proceed with the project; (2) building plans had been drawn and priced, finance had been sought and a demolition permit and quotation had been obtained in 2013; and (3) the project had been ‘on hold’ since October 2013, but not abandoned, while Mr Bergman considered the possibility of purchasing an alternative family home. It follows that the defendant would not have issued the policy on any terms if Mr Bergman’s demolition plan was disclosed, on inception of the policy or at each renewal thereafter including at the 2013 renewal date. Accordingly, s 28 of the Act applies to Mr Bergman’s non-disclosure — see s 28(1)(a).

In reaching this conclusion, I have considered how it is likely that the required disclosure would have been made. In my opinion, it is likely that the disclosure would have been made when Mr Bergman, or a reasonable person in his circumstances, read the demolition question and appreciated that demolition plans were relevant to the risk. The evidence of Mr Brown establishes that a positive answer to the demolition question (‘yes’) would have resulted in the defendant’s ‘Sunrise’ computer system preventing the proposed insurance proceeding unless one of the defendant’s underwriters first provided an authorisation number to the insurance broker. In such circumstances, the broker would have had the option of contacting the defendant’s underwriting department and explaining Mr Bergman’s demolition plans, in an endeavour to have the defendant accept the risk on some terms.

Mr Brown addressed that situation in his evidence in chief in the following exchange:

If a broker during the period of application of either the 2010 or 2012 guidelines was to have phoned up and said that the property which was sought to be insured was in fact a property which was to be demolished, is that a risk which [the defendant] would then have accepted?---No.[37]

[37]Emphasis added.

Although this evidence was brief, and did not descend to the detail of why, how or when the property ‘was to be demolished’, the answer is consistent with Mr Brown’s evidence that all properties which are ‘subject to any demolition plans or statutory orders’[38] are ‘blanket unacceptable risks’ to the defendant.
[38]Emphasis added.

Taking the evidence as a whole, I find that, if Midas had contacted the defendant’s underwriting department and explained the project and the prospect that Mr Bergman would proceed with it, the initial policy would have been refused. I am also satisfied that the same result would have followed if, in compliance with his duty of disclosure at the 2013 renewal date, Mr Bergman or his broker had contacted the defendant’s underwriting department and disclosed the three matters which I have said above would have then needed to be disclosed.

Misrepresentation

If my findings and conclusions concerning non-disclosure are wrong, s 28 of the Act applies to Mr Bergman’s misrepresentation based on his false answer to the demolition question. For the reasons given above for finding there was a relevant non-disclosure at the 2013 renewal date, I find that the misrepresentation arising from Mr Bergman’s wrong answer to the demolition question continued to be operative at the time of the 2013 renewal.

I turn to consider whether this conclusion is consistent with the provisions of the Act. In my opinion, there is nothing in s 28 of the Act which excludes from its application, in respect of fresh contracts arising on ‘renewal’ of a policy, misrepresentations at the time the initial policy was issued, provided they are not ‘spent’ at the time of the relevant renewal — as discussed above. Section 28(1) applies to any misrepresentation by a proposed insured to the insurer ‘before the contract [of insurance] was entered into’.[39]

Is the defendant’s liability under the policy reduced to nil by operation of s 28 of the Act?

[39]See FAI v McSweeney & Ors (1999) 10 ANZ Ins Cases 61–443 at 75,052–4.

Fraudulent non-disclosure or misrepresentation is not alleged in this case. For the reasons given above, s 28 applies to Mr Bergman’s non-disclosure and to his misrepresentation arising from the wrong answer to the demolition question and the continuing nature of the resulting misrepresentation at the 2013 renewal date.

The defendant contends that the only way it can be placed in the same position it would have been in if the non-disclosure had not occurred or the misrepresentation had not been made is by reducing its liability under the policy to nil, because: (1) it would never have issued the initial policy or any subsequent policy on renewal if Mr Bergman had complied with his duty of disclosure by informing it of the project and the prospect it would proceed; or (2) had correctly answered ‘yes’ to the demolition question.

Non-disclosure

I will deal first with the defendant’s pleaded case of non-disclosure. It was contended on behalf of Mr Bergman that the defendant’s case was limited to the allegation that Mr Bergman ‘intended to demolish the house’ and that such intention had not been proved as a definite intention at the 2013 renewal date. I do not accept that submission. For the above reasons, an existing intention on the part of Mr Bergman to demolish has been proved at that time. Moreover, the defendant’s case based on non-disclosure is not so narrow. In paragraph 11(a) of its defence, the defendant alleges that the plaintiff failed to disclose four facts:

(1) In May 2013 plans had been drafted for the proposed new home to be constructed on the property, at the request of Mr Nash as Mr Bergman’s project manager.

(2) Also in May 2013, Mr Larmer’s firm provided a quote to build the proposed new home in accordance with those draft plans.

(3) On 19 August 2013, Mr Larmer’s firm submitted a planning/building application in respect of the proposed new home.

(4) On 4 September 2014, a demolition permit had been obtained from the Glen Eira Council to demolish the existing buildings on the property.

In substance, paragraph 11(a) of the defence alleges non-disclosure by failing to inform the defendant of the project, the fact of the specified preliminary steps to enable it to occur, and (by inference) the prospect that the project would proceed.

For the reasons given above, I find that, if Mr Bergman had not failed to comply with his duty of disclosure as alleged, the defendant would not have issued the initial policy or any subsequent policy on renewal. The defence under s 28(3) is accordingly made out and the defendant’s liability under the policy should be reduced to nil.

Misrepresentation

The same result is achieved if focus is placed on the misrepresentation. As appears above, I accept the defendant’s evidence from Mr Brown and Mr Parker that, if Mr Bergman had given the true answer ‘yes’ to the demolition question, no policy would ever have been issued. I also accept that, if Mr Bergman’s insurance broker, Midas, had contacted the defendant to seek insurance following a refusal arising from a correct answer to the demolition question, the defendant would have refused to insure the property if proper disclosure had been made.

Did the plaintiff suffer loss for the purposes of the policy?

My conclusions concerning the defendant’s rights arising from Mr Bergman’s non-disclosure and misrepresentation make it unnecessary to consider the defendant’s alternative defence, that Mr Bergman suffered no loss by reason of the fire because he would, on the balance of probabilities, have demolished the buildings if the fire had not occurred. However, the relevant factual findings appear above.

Conclusion

For the above reasons, I have concluded as follows:

(1) Mr Bergman breached s 21(1) of the Act by failing to disclose matters relevant to the risk at the 2013 renewal date.

(2) Mr Bergman’s answer to the demolition question was false and contained a misrepresentation.

(3) That misrepresentation continued in effect at the 2013 renewal date and was false at that time.

(4) The defendant’s liability under the policy is reduced to nil by operation of s 28 of the Act.

(5) It is unnecessary to decide whether, had the non-disclosure and misrepresentation defences failed, Mr Bergman suffered loss for the purposes of the policy.

I will hear the parties as to the form of final orders and as to costs.

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[2016] VSC 81

9 March 2016